Councillor Randhawa Should Review His Math

(Note: This article contains hyperlinks. Text in blue will lead to relevant further reading.)

In my view, it’s one thing to be hyperbolic, it’s quite another to get the Grade 8 math wrong.

While it’s obviously subjective whether Fort Saskatchewan’s long-term debt is increasing at “breakneck speed,” as Arjun Randhawa claims, Randhawa’s much-touted supposed 275% increase — a number that has appeared even in his full-page newspaper advertising — is simply wrong mathematically using his own numbers. The correct formula puts the actual increase at 175%.

But, to me, what is more interesting is two things missing from his campaign rhetoric: a discussion of the Fort’s actual financial position and a closer look at the “how and what” of the City’s long-term debt.

Someone reading Arjun Randhawa’s “275%” claim in print or online may be surprised to learn that, as of the end of the last fiscal year, the Fort’s net financial position was actually in the black. This comes not from speculation, but from the numbers reported in the city’s audited financial statements.

The City’s “Consolidated Statement of Financial Position” reveals that the City’s financial assets sat at $66,272,719 on December 31st, while its liabilities were $62,845,907. Among these financial assets were nearly $7.5 million in cash and $49.6 million in investments, the latter being almost entirely held in GICs. That statement also reveals the City’s tangible capital assets to be worth over $453 million. (It’s useful to remember that just like any other piece of real estate, generally speaking, the value of City-owned buildings will also go up over time.)

Interestingly, Randhawa’s campaign rhetoric also doesn’t appear to make mention that a significant portion of the $27.2 million of long-term debt he references was incurred during a span when the city built two major “capital projects”: the new City Hall and the much-needed new police/by-law services station, at a cost of $18 million and $12 million respectively.

One may question why a City would carry both very liquid financial assets (e.g. cash and GICs) and long-term (but very low interest) debt at the same time. In other words, why not just pay it off? There are commonly a number of reasons for this, including:

– those financial assets being dedicated to specific reserve funds;
– the expectation by taxpayers that tax revenue is for short-term, operational spending, not capital projects;
– ensuring the City has sufficient working capital for its day-to-day operations;
– etc.

This last point — namely having a healthy amount of working capital — is particularly significant when considering Randhawa’s proposed policy “to ensure debt is never used for operational purposes.” It is frankly difficult to imagine a scenario where this could ever occur, causing this writer to question why Randhawa would even mention it.

Another important consideration as to why long-term debt makes sense is what is called “generational equity.” As explained by the City of Edmonton (but the point is applicable in virtually any municipal context): “Users of a capital project will likely change over its useful life and fairness would suggest that those costs should be paid by those who will use the infrastructure over time. Therefore, debt financing over a longer term can be more equitable than using funds collected and accumulated over time from current and prior residents who may not get to benefit from future improvements.”

In other words, long-term debt is a good mechanism to ensure those actually using infrastructure are those actually paying for that infrastructure. (And, as an aside, those who want to take a deeper look at municipal debt would be well-advised to read the City of Edmonton’s whitepaper on the subject.)

Moreover, the Fort’s long-term debt load is not particularly high on a per-capita basis compared to other communities. Edmonton’s financial statements imply a long-term debt per-capita number of $3,338 per person. In the City of Leduc, this number is $1,714 per person. In Fort Saskatchewan, we are very close to Leduc’s number, at $1,769 per person.

What many residents may not realize is that long-term municipal debt in Alberta is additionally favourable when compared to, for example, corporate borrowing, personal borrowing or municipal borrowing in provinces like Ontario. What I mean by this is that rather than borrowing from a bank, as you or I would for our personal or business use, long-term debt is typically borrowed from the Alberta Capital Finance Authority, or “ACFA.”

As stated on their website: “The Alberta Capital Finance Authority (“ACFA”) is a provincial authority and acts only as an agent of the Alberta crown. Its business is to provide local entities with financing for capital projects. ACFA is able to borrow in capital markets at interest rates which would not be available to local authorities acting independently.”

Moreover, substantial controls exist by provincial legislation/regulation to ensure that all municipalities keep debt to a sustainable level — without the need for additional policies at a municipal level, such as those suggested by Randhawa.

For example, debt servicing in Fort Saskatchewan cannot exceed 25% of a city’s total revenues. The total debt level is also capped at 150% of total revenues. Meanwhile, municipalities borrowing above 75% of their debt limit are subjected to greater borrowing scrutiny.

What does this mean for Fort Saskatchewan? Is our debt sustainable? Here are the facts:

Fort Saskatchewan currently sits at 38.6% of its long term debt limit. The City’s growth since 2010 has increased that debt limit by $36,835,602, but the City has been restrained in its use of that additional borrowing capacity.

In other words, despite Randhawa’s “breakneck speed” debt accumulation claim, the City has over $9.62 million in additional borrowing capacity than it did in 2010. Perhaps the City’s administration should instead get some credit for keeping control of the City’s fiscal reins.